Proxy Advisory Firms – “Herding Cats”

dennismccarthy@ariesmgmt.com – (213) 222-8260

When someone describes a very difficult task, they often liken it to herding cats.

Each cat moves in its own direction, confident in its path and independent, maybe even suspicious, of others around it.  This is why herding cats in one direction is so difficult.

Another group that shares these characteristics are Wall Street investors.  It’s Wall Street investors’ independent perspectives on the stock market that makes the market.  At any moment, some are buyers and some sellers.

This is why it is so impressive that the firms, known as proxy advisory firms, have managed to gain such influence on Wall Street. These proxy advisory firms come close to herding cats.

So, what is a proxy advisory firm?

A proxy advisory firm will take a very visible position on corporate matters subject to shareholder vote.  Then the firm encourages Wall Street investors to vote as the proxy advisory firm recommends.

These proxy advisory firms have no control over Wall Street investors, only the power to sway investors by their argument supporting their recommended position.

No, shareholders don’t always vote as the proxy advisory firms recommend but often they do.

Over the years, a few proxy advisory firms have earned a powerful reputation for producing recommendations on shareholder vote issues which are supported by well-reasoned thinking and should result in outcomes which benefit shareholders and corporations.

Sure, there are times when corporations view the proxy advisory firms as adversarial.  The proxy advisory firms would likely respond that their positions on shareholder vote issues should improve corporate governance practices which are in the best longer-term interest of companies too.

Regardless of the motives, proxy advisory firms’ power is unmistakable.

These firms have changed the dynamics on Wall Street.  Under the guidance of proxy advisory firms, shareholders now act in more coordinated fashion on corporate policy issues including management compensation and M&A defense provisions. 

And, the proxy advisory firms’ influence is growing.  At some point, the balance of power may shift. 

Already, we see isolated incidents.  Over time, company after company may recognize the change.  Eventually, coordinated shareholder instruction to direct major corporate actions may come to be seen as the normal order.

I know it’s hard to imagine now. Time will tell.

Please contact me to discuss this topic or for assistance with any capital raising or M&A projects.

Herding Cats